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<\/a><\/p>\nBefore diving into real estate investing, make sure you understand how to compare markets and properties. Whether you\u2019re trying to decide between investing in Boise or Sacramento\u2014or you\u2019re just comparing two similar homes\u2014this guide will walk you through all the numbers you need to know. From calculating cash-on-cash return to running a comparative market analysis, the experts at BiggerPockets demonstrate the steps you need to follow and the statistics you must know with\u00a0The Beginner\u2019s Guide to Real Estate Market Analysis<\/a>.<\/em><\/p>\n While you can calculate potential rental income in a spreadsheet (and, okay, let’s be honest, you’ll probably want to do that too), why not start with paper? Pen and paper (or, in this case, pen and napkin) get you up close and personal with the number, so you can be sure your investment property sings.<\/p>\n After running the initial numbers, plug your details into the BiggerPockets Rental Calculator<\/a> for a full report. We’ll help you determine the profitability of a potential rental property, estimate potential monthly and annual cash flow, calculate return on investment, and plan for unforeseen expenses. You can even create a PDF to show your partners.<\/p>\n This will either be rent the current tenants are paying, the asking rent, or, if you have neither of those, you can talk to a local property manager or real estate agent who can give you a market rent value for the property.<\/p>\n If the property already has tenants paying a certain rent, or you have an ideal asking rent in mind, make sure it’s realistic for the neighborhood before moving forward. Are the existing tenants paying above market rent? They might be inclined to leave. And if they’re paying\u00a0below\u00a0market rent, there may be room for a future increase.<\/p>\n These may include property taxes, insurance, property management fees, mortgage or financing costs, and homeowners association (HOA) fees.<\/p>\n Most importantly, don\u2019t forget vacancy and repairs! They are a real part of any property investment, and they can dramatically affect the cash flow. Still, many people don\u2019t think to include them in the expenses.<\/p>\n Here’s how to estimate your total expenses.<\/p>\n Related<\/strong><\/em>: How to Estimate Future CapEx Expenses on a Rental Property<\/a><\/em><\/p>\n This is your net income\u2014your monthly cash flow. Yay! Hopefully it\u2019s positive. If it\u2019s not positive, run.<\/p>\n Two numbers I want to see on any property I evaluate are the cap rate and the cash-on-cash (COC) return.<\/p>\n Capitalization rate (cap rate)<\/strong><\/p>\n This gives you an idea of whether the property is a good deal. It basically compares the return on investment (ROI) to the purchase price. Here’s the cap rate equation: Net operating income (NOI) \u00f7 purchase price (or market value, if you already own the property) =\u00a0cap rate<\/strong> Note: I don\u2019t include the mortgage payment in this calculation.<\/p>\n The lowest cap rate I would ever want to see for any property, whether residential or commercial, is 6%. The lowest I would want to see on a residential rental property in this market is 8%\u2014and even then, there had better be a good reason it\u2019s that low, like the property is in a \u201csexy\u201d market or highly desirable area. Anything over 8% means you’re doing well, in my opinion.<\/p>\n Related:\u00a0<\/strong><\/em>Cap Rate: A Must-Have Number for Rental and Commercial Investors<\/em><\/a><\/p>\n Cash-on-cash return<\/strong><\/p>\n This number indicates how much return you are getting on the money you invest. If you pay all cash for a property, this number will be the same as the cap rate. If you are financing, this number is the most accurate way to see the actual return you are getting on your cash-in and the leverage. Here is the equation\u2014and remember to include the mortgage payment, since this one is focused on financing: Net annual income \u00f7 total cash invested =\u00a0cash-on-cash return Understand the difference? One measures how good a deal you are getting on the purchase price, and the other tells you the exact return on your money you are getting. They are the same for an all-cash buy but can be very different for a leveraged purchase.<\/p>\n If you compare the cash-on-cash returns of an all-cash buy versus a financed buy, you may quickly see the benefit of leveraging! Way more bang for your buck. Try it out on a napkin sometime.<\/p>\n Related:\u00a0<\/strong><\/em>How to Calculate Cash-on-Cash Return (Made Easy!)<\/em><\/a><\/p>\n Apply these steps to an actual property? On a real napkin? You got it. Even more fun, I\u2019m going to use a property that I bought for myself in Atlanta.<\/p>\nRunning a rental property analysis on a napkin<\/h2>\n
1. Figure out the monthly income (gross income)<\/h3>\n
2. Calculate the monthly operating expenses<\/h3>\n
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3. Subtract the monthly expenses from the monthly rent<\/h3>\n
4. Calculate the returns<\/h3>\n
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\n<\/strong><\/p><\/blockquote>\nPractice problem\u2014on an actual napkin<\/h2>\n
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